Commodities Lead Gains as Emerging Markets Drop

By Maria Kolesnikova -
Sep 2, 2013

Commodities beat bonds, stocks and
the dollar for a third month, the longest winning streak in two
years, as the prospect of military strikes in Syria boosted oil
and gold. Emerging markets declined as currencies plunged from
Brazil to Turkey to India.

The Standard & Poor’s GSCI Total Return Index of 24 raw
materials rose 3.4 percent in August as U.S. crude reached a
two-year high and gold rallied close to a bull market. The MSCI
All-Country World Index (SPX) of equities in 45 markets fell 2 percent
including dividends and the U.S. Dollar Index, a measure against
six trading partners, gained 0.8 percent. Bonds of all types
lost 0.352 percent on average, according to Bank of America
Merrill Lynch’s Global Broad Market Index of 20,000 fixed-income
securities.

Raw materials erased this year’s losses after data signaled
faster growth in Europe, the U.S. and China. They extended gains
as western nations debated attacking Syria after accusations the
government used chemical weapons against its own people,
increasing concern about disruptions to Middle East oil supply.
Investors withdrew about $44 billion from emerging-market stock
and bond funds since the end of May, Cambridge, Massachusetts-based EPFR Global, which tracks money flows, said Aug. 23.

“There is definitely a stealth recovery going on in
commodities,” said James Paulsen, the Minneapolis-based chief
investment strategist at Wells Capital Management, which
oversees about $340 billion of assets. “Bonds are getting
killed, and stocks stopped going up as a result of the re-pricing going on in bonds. Things are still good enough to
prevent stocks from going down a lot.”

Purchasing Managers

A Chinese gauge of manufacturing rose to a 16-month high in
August as new orders jumped and overseas demand rebounded. China
is the biggest consumer of everything from coal to copper. The
17-nation euro-region emerged from its longest-ever recession in
the second quarter and U.S. economic growth accelerated as
unemployment declined.

West Texas Intermediate, the U.S. oil benchmark, advanced
2.5 percent to $107.65 a barrel in August, rising for a third
month. Brent, its European equivalent, added 5.9 percent to
$114.01, the biggest gain in a year. The two grades account for
almost half of the S&P GSCI. WTI fell 0.8 percent today.

A strike on Syria could drive Brent as high as $130, Bank
of America Corp. said Aug. 29. Russia, an ally of Syria that has
a veto on the United Nations Security Council, blocked previous
UN action against Syria. Iran Foreign Ministry spokesman Abbas
Araghchi warned Aug. 27 that a military strike would have
“great consequences for the region.” President Barack Obama
said Aug. 31 he will seek congressional authorization to use
military force against Syrian regime targets.

Exchange Traded

Gold rose 5.3 percent to $1,395.15 an ounce in London,
paring this year’s loss to 17 percent. While the metal is still
27 percent below the record set in 2011, some investors are
buying to hedge against faster inflation should energy prices
keep rising. Gold will average $1,295 in the fourth quarter, the
median of 26 analyst estimates compiled by Bloomberg shows. It
fell 0.3 percent to $1,392 today.

Silver surged 18 percent to $23.5225 an ounce, the biggest
gain among commodities. Holdings in exchange-traded products
reached a record as investors bought the metal both as a hedge
against inflation and as a bet on a stronger economy because
about half goes into industrial applications. Prices will
average $21 in the fourth quarter, the median of 21 analyst
estimates compiled by Bloomberg shows.

Federal Reserve

Hedge funds and other large speculators are the most
bullish on raw materials since February, according to Commodity
Futures Trading Commission data across 18 U.S. futures compiled
by Bloomberg. Combined open interest, or contracts outstanding,
across the members of the S&P GSCI expanded for the first time
in three months, rising 1 percent to 13.16 million contracts,
the most recent data compiled by Bloomberg show.

The strengthening U.S. economy heightened speculation the
Federal Reserve will cut its monthly $85 billion bond purchases,
with 65 percent of economists in an Aug. 9-13 Bloomberg survey
predicting that outcome when officials meet Sept. 17-18. Stocks,
bonds and commodities fell and the dollar rose as minutes of the
Fed’s July meeting released Aug. 21 showed policy makers
supported stimulus cuts this year if the economy improves.

“Investors have been skeptical and focusing on the
negative of Fed tapering,” said Leo Grohowski, chief investment
officer of New York-based BNY Mellon Wealth Management, which
oversees more than $175 billion of assets. “They are forgetting
a less accommodative Fed means the economy is on a better
footing and for us, what it does is give us great confidence in
our earnings forecasts.”

Consumer Staples

A Bloomberg measure of the combined market capitalization
of global equity markets fell $1.3 trillion, or 2.3 percent, to
$55 trillion. The Standard & Poor’s 500 Index retreated from the
record 1,709.67 set Aug. 2, dropping 3.1 percent, the most since
May 2012. The gauge is still up 14 percent for the year, on
track for the best annual performance since 2009.

Utilities, telecommunications providers and companies that
produce consumer staples helped lead the S&P 500 lower in August
as rising Treasury yields reduced demand for dividend stocks.
The three groups offer at least 3 percent in dividend yields,
compared with a 2.79 percent yield for 10-year Treasury bonds.

The S&P 500 will finish the year at 1,683, or a 3.1 percent
gain from the last close, according to the average estimate from
18 strategists surveyed by Bloomberg.

Current Account

Foreign investors withdrew a combined $2.2 billion from
equities in Thailand, Indonesia and the Philippines. Thailand’s
economy contracted in the second quarter, while Indonesia’s
current-account deficit widened to a record, government data
showed.

Indonesia’s rupiah weakened 5.9 percent against the dollar
and India’s rupee tumbled 8.1 percent, the biggest monthly
retreat since 1992. Rising crude prices threaten to worsen the
record current-account gap in India, which imports about 80
percent of its oil.

Emerging Markets

The weakening in the currencies of countries with large
current-account deficits, such as the rupee and lira, have
“scope to continue as capital inflows into emerging markets
remain weak,” Goldman Sachs Group Inc. wrote in a report Aug.
28. The rout in emerging market bonds and currencies may be
easing as Treasury yields stabilize, Charlie Robertson, the
London-based global chief economist at Renaissance Capital,
wrote in a report a day later.

Treasuries fell 0.539 percent, a fourth monthly decline.
Yields on 10-year U.S. government debt will be little changed at
2.73 percent by the end of the year, from 2.79 percent now,
according to the median estimate of 66 economists surveyed by
Bloomberg News. The Commerce Department raised its estimate for
second-quarter growth to 2.5 percent from 1.7 percent on Aug.
29. Unemployment has dropped to 7.4 percent, from 8.2 percent a
year ago.

U.K. bonds were the best performers in dollar terms among
the 26 sovereign markets tracked by Bloomberg and the European
Federation of Financial Analysts Societies, rising 1.08 percent.
Japan’s were second with a 0.23 percent gain while South African
debt lost the most with a 5.66 percent decline followed by a
4.73 percent retreat for Norway.

“You have two major contributing factors to the uneven
performance numbers of August,” said Chad Morganlander, a
Florham Park, New Jersey-based fund manager at Stifel Nicolaus &
Co. whose company oversees about $130 billion of assets. “A
monetary repositioning is a certainty going into the latter half
of the year, courtesy of the Federal Reserve. Geopolitical
unrest in Syria has bolstered demand for commodities as a
flight-to-safety trade has to some degree kicked in.”